THE CHINESE ANTIMONOPOLY LAW
 David S. Eggert 
Arnold & Porter
Background
Before 1978, there were no private enterprises to
speak of in China – communist ideology reigned

1978-1992
growth in private enterprises

1992 acceleration of private enterprise growth, goal
to create a “socialist market economy”

2001 China joins WTO, committing to competition
policies

As of 2003, SOEs (State-Owned Entities) and related
entities account for 55% of capital invested and 50%
of annual revenue. Perhaps down to 35% today.
2
Background (cont’d)
Most private enterprises remain small to medium
size; SOEs are the biggest operators or SOEs in
important industries, like electricity, petroleum,
railroads, aviation, telecommunications, and
banking. Those tend to be industries considered
key to national security and China’s economic
development

Desire for political stability. But there is a
potential tension between this desire and the
inherent economic instability associated with
free competition.
3
Background (cont’d)

There is also a perception among many
Chinese that the growth of Chinese industry is
threatened by large multinationals who could
undercut (or merge with) local industries
(UNOCAL/Carlyle Group).

Drafting of the AMC started in 1994 and took 13
years – a Chinese record for development time
for new legislation.
4
Legal Context






Laws on the books do not necessarily mean
enforcement on the ground.
Regulation by government agencies is not transparent
and is normally difficult to attack in the courts.
The courts are not independent in the U.S. sense and
often are controlled by the party or the government.
Most judges are not trained lawyers (or economists) and
until recently, were largely retired military officers. But
more recently appointed judges tend to be lawyers.
Chinese law does not have a stare decisis tradition.
Current antitrust enforcement is divided between several
agencies and it is unclear what the new paradigm will
be.
5
Monopoly Agreement

“Agreements” refers to (i) agreements,
(ii) resolutions, or (iii) other coordinated acts
for the purpose of eliminating competition.

“Agreements” are written or oral agreements
reached by two persons or entities.

“Resolutions” are issued by a group of
enterprises that request member enterprises to
act in a certain way.

Other coordinated measures extend to express
or implied communication without written or oral
agreements.
6
Monopoly Agreement (cont’d)

Horizontal Agreements (Article 13). Examples:
price-fixing, limiting supplies, dividing markets,
joint boycotts, preventing development or
purchase of new technology

Vertical Agreements (Article 14). Resale price
maintenance is illegal, as is setting minimum
resale prices No express mention of other
vertical restraints like exclusive territories,
location restrictions, exclusive dealing.
Maximum RPM prohibited in early drafts but not
mentioned in final draft.
7
Monopoly Agreement Exemptions

Exemptions (must be obtained from Chinese authorities
(Article 15)

improving technology/developing products

improving quality, reducing cost, enhancing
efficiency, standardizing specifications.

improving operational efficiency of small- to
medium-sized businesses and enhancing their
competitiveness (may be significant)

achieving public interest such as environmental
protection concerning energy, disaster relief
8
Monopoly Agreement Exemptions (cont’d)

alleviating declines in sale volumes or large
production surpluses during difficult economic
times

purpose of safeguarding interests in foreign
trade and economic cooperation

anything stipulated by the State Council
Many exceptions hinge on “purpose,” whereas U.S.
law tends to focus on both purpose and effect. The
exceptions would carve out exemptions from what we
have as per se rules in the U.S.
9
Abuse of Dominant Market Position

A dominant position is similar to what we
would call a “monopoly” under U.S.
antitrust law – a market position that gives
a firm the ability to control prices or output
and obstruct the entry of competitors
(Article 18)

50% market share (somewhat less than in
U.S.) results in a presumption of dominance

unlike U.S., the AML recognizes “shared
monopolies” – 2 firms with 67% or 3 firms with
75% (any of the firm with at least 10% share is
included in the presumption)
10
Abuse of Dominant Market Position (cont’d)
Under Article 17, in addition to market share,
also look at (1) ability to control sales,(2)
financial power, (3) reliance by other
undertakings, (4) ease of entry; (5) other
factors
11
Abuse of Dominant Market Position (cont’d)

Like U.S. and Europe, the provision does not make it
illegal simply to have a dominant position -- although
earlier drafts of the AML had declared the mere existence
of a monopoly illegal . The only prohibition is that
dominant operators may not “abuse” their dominant
position (Article 19), including the following (if done
without “justification”):
 Unfairly high sales prices or low purchase prices (like
Europe, not U.S.)
 Predatory / Below Cost Pricing
 Refusal to Deal
 Exclusive Dealing
 Tied Sales
12
Limits on Concentration



In the past, the only antitrust style merger
regulations applied only to foreign companies
seeking to purchase Chinese companies; now,
the new law applies to domestic companies as
well.
Applies not only to mergers but to equity or
asset purchases or obtaining control of another
entity by contract.
As in the U.S. and Europe, advance notification
of mergers is required. (Article 21). The
reporting thresholds do not appear in the AML
but are to be separately developed by the State
Council.
13
Limits on Concentration (cont’d)
Features of review process (Articles 25-26)



Preliminary review period of 30 days, resulting
either in a green light or notifying parties of need
for further review.
If there is additional review, decision to be
rendered within 90 days of the preliminary decision
to investigate further.
Substantive standard: does the combination have
the effect of restricting or eliminating competition,
and, if so, can parties demonstrate that the
positive effects on competition are more
substantial than the negative effects or that the
concentration is nevertheless in the public interest.
14
Notifying Mergers Under the AML
(Arts 20-24, 48)

Mandatory notifications




Mergers, acquisitions, and
other transactions resulting in
control
Nationality irrelevant
Exceptions for parties already
under common control
Filing thresholds


State Council to determine
thresholds remain in place for
now
Will thresholds be linked to
potential or competitive effects
in China?

Consequences for
implementation without
approval



Fines up to ¥500,000
Possible unwinding of
transaction
Information required for
notification: (US and EU
hybrid?)



Basic materials (application,
agreement, financials)
Explanation of effects on
competition
Other documents and
materials requested by
authorities
15
Approving Concentration



In approving a transaction, the State Council anti-monopoly law
enforcement authorities may do so subject to conditions (e.g.,
divestitures, allowing competitors access to intellectual property,
etc.).
Factors to consider in regarding competitive effects include:
 relevant market shares,
 level of market concentration,
 effect on market entry and technological advances,
 effect on consumers and competitors,
 the effect on national development,
 any other factor enforcement authorities deem worthy of
consideration.
Article 31: National Security Concerns – Applicable only to mergers
involving foreign entitles purchasing Chinese ones.
16
Administrative Monopoly/State Dominated
Sectors
Under Chapter V, Government agencies cannot:
 require individuals or organization to deal with
particular entities (i.e., “local champions”)
 impose standards to favor one region over another
 restrict bidding or market entry
 operators must be honest and trustworthy and not
abuse or exploit their controlling position.
 Enforcement unclear.
17
Administrative Monopoly/State Dominated
Sectors (cont’d)
Under Article VII,
 Article 7 provides that the state shall protect the lawful business
activities of operators in vitally important industries where the state
holds a controlling position.
 The state shall regulate the business activities and pricing
practices of such entities and safeguard consumers while
promoting technological advances.
 Unclear whether such entities will be subject in any meaningful
way to the AML.
 Also, Article VII of the Chinese Constitution, “the state economy is
the section of the socialist economy under ownership by the whole
people; it is the leading force in the national economy. The state
ensures the consolidation and growth of the state economy.”
18
Penalties for Violations
 Confiscation of illegal earnings.
 Fine between 1 – 10% of previous years’ sales.
 For unimplemented attempts, fines up to
$500,000 RMB ($125,000).
 “Voluntary Surrender” system similar to
amnesty programs.
 Administrative agencies who violate suffer no
penalties; Enforcement Authority can merely
give “recommendation” to the agency’s “higher
authority”
19
Penalties for Violations (cont’d)
 Article 50 provides for civil liability to those
injured – specific type of compensation to
be based on the specific situation but can
potentially include compensation for
losses. Lots of open questions – e.g,
where are actions filed, is a prior finding of
a violation by the enforcement authority a
prerequisite, are attorney fees and costs
recoverable, what kind of damages are
recoverable?
20
Extraterritorial Application
 The law applies to monopolistic practices
outside of China which have the effect of
eliminating or restricting competition in China.
 Similar in this respect to extraterritorial
application of U.S. law.
21
Key Summary Features of AML

Recognition of consumer welfare as underlying goal

Regulation of domestic as well as foreign-related transactions

Administrative monopolies subject to law

State-owned enterprises probably exempt if properly
authorized

Various exemptions to monopoly agreements, including
concern for small and medium operators and protecting
against “ruinous competition”

Dominance applies not only to single firm conduct but also to
two or three combined firms, and abusive practices can
include high prices

Mergers require pre-notification
22